The Indian government faces a chronic problem with tax compliance. Nobody pays income tax. Tax rates are relatively high, and the tax system is byzantine. The entire economy is structured in such a way as to help people keep their income off the books. As a result, the government has trouble collecting revenue:

It is estimated that only about 3% of India’s one billion-strong population pay income tax.

“There are only 75,000 to 85,000 people with an income of one million rupees ($22,140) who pay taxes,” Finance Minister P Chidambaram told journalists. [Link]

The text message reads: “Pay your taxes, file your returns and hold your head high. Happy Diwali!” To root out tax evaders, the revenue service is watching people’s behavior during the one time of year when they can’t help but spend money — Diwali. As much as most Diwali-celebrating Indians hate paying taxes, the social consequences of being seen as cheap during a period of conspicuous consumption and status competition are far worse.

Diwali is a time when most Indians loosen their purse strings, buying gifts and making major purchases such as buying a car, and the finance minister said big spenders would be watched.

People with credit card transactions of more than 200,000 rupees a year ($4,435) will be checked by the tax department to see if they have filed their taxes or not.

Similar checks will be run on people who make cash withdrawals of one million rupees ($22,179) or more, or who have bought mutual funds worth more than 200,000 rupees. [Link]

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p>My favorite aspect of this campaign goes after shoppers where it hurts – their mobile phone usage. What kind of Indian shopper can resist gabbing away on their mobile to their friends? The longer they shop, the larger the phone bill will be, thus altering the authorities to the presence of a wealthy person who, in all likelihood, has not paid their tax bill.

Mobile phone users who run up a bill in excess of 1,000 rupees ($22) a month can expect to receive a text message from the finance ministry to pay up.

“Pay your taxes, file your returns and hold your head high. Happy Diwali,” reads the message. [Link]

All of this effort to collect an income tax makes me wonder if it wouldn’t be more efficient to simply impose a sales tax. Sure, sales taxes are regressive, but they would substantially raise compliance amongst the rich. The same free spending behavior that the government is currently using as a proxy for unpaid taxes could simply be taxed directly.

If the revenue service wanted to be really creative about it, they could create a diwali special sales tax lottery, that would combine the fun of shopping, gambling and avoiding paying your taxes. They could give shoppers the option of paying the regular sales tax or gambling against having to pay a higher rate. Even if the odds clearly favored the house, I’ll bet that many shoppers would choose the latter option for the sheer thrill. Entertaxment is clearly the wave of the future!